The Others Are Being Pushed Over The Fiscal Cliff By China
Yesterday, Jeff Stein and Rachel Siegel reported that the world is watching in disbelief-- and horror-- as the U.S. circles the default drain. At a meeting of finance ministers for the Group of 7 nations last week in Japan, “all of Yellen’s counterparts were aware of the potential global ramifications if the United States were to default on its debt… [E]xperts are watching in disbelief as the U.S. flirts with its first default, fearful of the potential international economic ramifications— and astonished by the global superpower’s brush with self-sabotage. Rich and poor nations alike fear a possible U.S. default, which would torpedo the financial markets and deal a massive blow to the dollar. Analysts say the impasse jeopardizes America’s standing abroad. And foreign economists and policymakers are bewildered over why the United States has imposed a specific limit on its debt and then turned it into a political football.”
But the U.S. isn’t the only country contemplating default right now— even if it is the only country where the economic system is being sabotaged by a partisan and extremist domestic group. In the cases of countries on the brink of default, the culprit isn’t their version of the GOP, but the world’s worst loan shark, China. The countries at imminent of default right now because of China are Pakistan, Republic of Congo, Mongolia, Laos, Zambia, Ethiopia, Angola, Sri Lanka, Kenya, Uganda, Ecuador and Mozambique.
Before we look at this mess, let’s look at what it means for a country to default— like, what it means to the people who live in those countries. Argentina (2001) and Greece (2012) are two instructive examples. Argentina defaulted on a massive $95 billion in sovereign debt, result of over borrowing, a deep recession, a currency devaluation, and a dysfunctional, unstable political system. In the late 1990s Argentina was in an economic boom, mostly fueled by large capital inflows. The default was caused by unsustainable fiscal policies, a fixed exchange rate pegged to the US dollar and an inability to make structural reforms. The economy experienced a sharp economic contraction (a decline in GD, many failed businesses, individuals experiencing a decline in income and purchasing power), high inflation, a banking crisis during which the government froze private accounts and limited cash withdrawals, rising unemployment (as high as 20%), and, as a result, social unrest. The government implemented various measures, including a currency devaluation (which led to a sharp increase in the price of imported goods, including essential commodities and soaring inflation, eroding the value of people's savings and making it harder for individuals and businesses to afford basic necessities from medicine, fuel and food to raw materials for industries) and restructuring of its debt, to stabilize the economy and regain access to international financial markets. Poverty rates soared— from around 24% to around 54% according to the World Bank. Think about that: over half the country was living in poverty, unable at times to access things like food and healthcare.
In 2012, Greece also defaulted because of a high budget deficit, unsustainable public debt levels, and, like Argentina, a dysfunctional political system that couldn’t muster the will to make structural reforms. In 2010, Greece received its first international bailout package from the EU and the IMF, but it came with conditions— the kind of severe Austerity (pension cuts, reduced public services and public sector layoffs and wage reductions, as well as higher taxes on working families) that has been promoted by conservatives— including conservatives in the U.S. Congress today. The austerity measures imposed on Greece triggered social unrest and further economic contraction including a devastating recession, a decline in the GDP, business failures, dried up investment, a brain drain and record high unemployment (from 9% in 2009 to 27.5% in 2013— with youth unemployment rising to 60%). The poverty rate jumped from 20% to 36%.
Some time ago (1997, I think), Roland and I visited one of those at-the-edge-of-the-world places, Hambantota, which was about as far as you could go in Sri Lanka without wandering into the country’s civil war at the time. Hambantota had another danger though— well two dangers, one for me and one for the country. Hambantota has the strongest undertow I ever experienced. You could wade out into the ocean to your ankles and feel you’re going to be swept out to sea. The hotel-like thing we were staying in was partially closed because it was filled with bats, so the next day we decided to drive inland. Almost immediately on setting out, we had to drive around the biggest python I had ever seen, stretched out across the road sunning itself. Anyway, none of that is what I meant about the danger to the country. That was a port being built by China, a port that China now has a 99-year lease to after Sri Lanka couldn’t make the high interest payments.
Generally, the terms and conditions of Chinese loans aren’t disclosed publicly, which makes it challenging to assess the full implications and potential risks associated with these loans, but the loans are often predatory and secured with collateral in the form of natural resources or infrastructure assets. If the borrowing country is unable to repay the loan, China can gain control over these assets or resources, sometimes impinging on the sovereignty of the debtor nations (the way European countries impinged on Chinese sovereignty during the 19th Century-- the "Century of Humiliation." So why would anyone borrow from them? Unlike traditional lenders— the U.S. and U.S.-controlled international agencies— that often attach policy conditionality to loans, China's loans typically come with fewer governance or economic "reforms" attached. This approach is appreciated by borrowing countries— particularly authoritarian regimes and kleptocracies— seeking more "flexible" funding.
On Thursday the AP’s Bernard Condon took a look at the countries on the brink of financial collapse now due to China’s predatory lending policies. What he found was that paying back the loans “is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel. And it’s draining foreign currency reserves these countries use to pay interest on those loans, leaving some with just months before that money is gone. Behind the scenes is China’s reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.”
Countries in AP’s analysis had as much as 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying off foreign debt. Two of them, Zambia and Sri Lanka, have already gone into default, unable to make even interest payments on loans financing the construction of ports, mines and power plants.
In Pakistan, millions of textile workers have been laid off because the country has too much foreign debt and can’t afford to keep the electricity on and machines running.
In Kenya, the government has held back paychecks to thousands of civil service workers to save cash to pay foreign loans. The president’s chief economic adviser tweeted last month, “Salaries or default? Take your pick.”
Since Sri Lanka defaulted a year ago, a half-million industrial jobs have vanished, inflation has pierced 50% and more than half the population in many parts of the country has fallen into poverty.
Experts predict that unless China begins to soften its stance on its loans to poor countries, there could be a wave of more defaults and political upheavals.
…China’s unwillingness to take big losses on the hundreds of billions of dollars it is owed, as the International Monetary Fund and World Bank have urged, has left many countries on a treadmill of paying back interest, which stifles the economic growth that would help them pay off the debt.
Foreign cash reserves have dropped in 10 of the dozen countries in AP’s analysis, down an average 25% in just a year. They have plunged more than 50% in Pakistan and the Republic of Congo. Without a bailout, several countries have only months left of foreign cash to pay for food, fuel and other essential imports. Mongolia has eight months left. Pakistan and Ethiopia about two.
“As soon as the financing taps are turned off, the adjustment takes place right away,” said Patrick Curran, senior economist at researcher Tellimer. “The economy contracts, inflation spikes up, food and fuel become unaffordable.”
…In Sri Lanka, rioters poured into the streets last July, setting homes of government ministers aflame and storming the presidential palace, sending the leader tied to onerous deals with China fleeing the country.
…Many Chinese loans go to projects in areas of countries favored by powerful politicians and frequently right before key elections. Some of the things built made little economic sense and were riddled with problems.
In Sri Lanka, a Chinese-funded airport built in the president’s hometown away from most of the country’s population is so barely used that elephants have been spotted wandering on its tarmac.
Cracks are appearing in hydroelectric plants in Uganda and Ecuador, where in March the government got judicial approval for corruption charges tied to the project against a former president now in exile.
In Pakistan, a power plant had to be shut down for fear it could collapse. In Kenya, the last key miles of a railway were never built due to poor planning and a lack of funds.
…Some poor countries struggling to repay China now find themselves stuck in a kind of loan limbo: China won’t budge in taking losses, and the IMF won’t offer low-interest loans if the money is just going to pay interest on Chinese debt.